It’s Time to Modernize the Communications Sales and Use Tax

January 17, 2018

VACo has worked with Delegate Vivian Watts to introduce legislation to modernize the Communications Sales and Use Tax (CSUT) to reflect the present-day telecommunications landscape. Language in support of such a proposal was adopted in VACo’s 2018 Legislative Program. VACo encourages member counties to prepare resolutions in support of HB 1051; resolutions should be sent to Dean Lynch at dlynch@vaco.org.

What the Bill Does
The legislation updates the CSUT by applying it to audio and visual streaming services – technology that was in its infancy when the CSUT was instituted in 2006. The bill also removes the current exemption for the sale or recharge of a prepaid calling service, placing this service on an equal footing with postpaid calling, which is subject to the CSUT.

Background on the CSUT
The CSUT was established by the 2006 General Assembly and took effect January 1, 2007. It replaced certain local taxes and fees on telecommunications services with one consolidated tax levied by the state at a rate of 5 percent. The CSUT is collected and remitted by communications service providers to the Department of Taxation, where it is deposited into the Communications Sales and Use Tax Trust Fund. The Department recoups its costs to administer the tax from the Fund, and then a portion is allocated to the Department for the Deaf and Hard-of-Hearing to fund the telephone relay service center and to localities that had cable television franchise agreements in effect as of January 1, 2007 and are owed franchise fees. The remaining funds are distributed in accordance with each locality’s share of total revenues received from the local taxes and fees that were in place in FY 2006, prior to being replaced by the CSUT.

2015 Review of the CSUT
The Department of Taxation conducted a study in 2015 at the direction of the General Assembly; the Department worked with an advisory panel of stakeholders, including representatives of local government and the communications industry. Part of the Department’s charge was to “identify any communications services that receive a competitive advantage by not being taxed” and “determine whether the tax is structured such that it will apply to new methods of communications.”

The Department’s report notes that in general, since the inception of the CSUT, it has generated declining amounts of revenue. CSUT Fund revenues in FY 2008 were $472 million (adjusted for refunds and transfers); in FY 2015, that amount had fallen to $396 million. Part of this decline is attributable to a transition by consumers away from landline telephones; in the report, the Department estimates a 21.1 percent decrease in the number of landlines between 2007 and 2014.

The report also discusses a flourishing new communications service that is not subject to the CSUT: audio and visual streaming. While cable television services such as pay-per-view and video on demand are subject to the CSUT, audio and video content streamed over the internet is not, a situation the report describes as placing the cable providers at a competitive disadvantage. The Department estimated that if the CSUT had been imposed on streaming services in 2014, it would have generated an additional $10 to $20 million for distribution to localities. The report makes a similar point about the carve-out for the sale or recharge of prepaid calling services, which the Department suggested were growing at a faster rate than post-paid calling services, and were receiving a competitive advantage over comparable services provided through a post-paid monthly plan.

The report concludes, “If the General Assembly would like to enact legislation to increase CSUT revenues and level the playing field, this can be accomplished by broadening the tax base by eliminating the current exemptions for audio and video streaming services and prepaid calling services.”

VACo Contact: Katie Boyle

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